Incremental Fiscal Policy "Ready to Launch"

After a series of monetary policies such as central bank reserve requirement ratio cuts and interest rate reductions were introduced, market confidence has been effectively boosted. The Central Political Bureau meeting emphasized the need to "introduce incremental policies with greater force." Against this backdrop, expectations for fiscal policy to take action have further heated up, and whether incremental fiscal policies will be introduced in the fourth quarter has become a focal point of recent discussions.

On October 9th, the State Council's Information Office announced that a press conference would be held on the 12th, inviting the Minister of Finance, Lan Fo'an, to introduce the situation related to "increasing the counter-cyclical adjustment strength of fiscal policy and promoting high-quality economic development," and to answer questions from journalists.

The release of this news has become an important support for the continuous improvement of sentiment at this stage. In the view of industry experts, to fundamentally solve problems such as lack of confidence, weak demand, and credit contraction, fiscal policy needs to make greater breakthroughs. Only in this way can it form a joint force with monetary policy and ensure steady economic growth in the fourth quarter.

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Fiscal and monetary policies need to be coordinated.

Since the central bank launched a combination of monetary policies on September 24th, the market has had high expectations for incremental fiscal policies.

On October 8th, the Information Office held a press conference attended by the Director of the National Development and Reform Commission, Zheng Shanjie, who introduced the implementation of a series of incremental policies. The meeting further clarified two directions for incremental fiscal policies: First, next year, the issuance of ultra-long-term special treasury bonds will continue to support the construction of "two important areas" with greater force; at the end of this month, the central budget investment plan for next year of 100 billion yuan and the list of "two important areas" construction projects of 100 billion yuan will be issued in advance.

Second, focusing on local government special bonds, it is urged that the relevant localities complete the issuance of the remaining approximately 290 billion yuan of special bond quotas for this year by the end of October. At the same time, efforts are being made to study the reasonable expansion of the scope of support for local government special bonds, and to introduce new measures to optimize and improve the management of special bonds as soon as possible.

Yang Zhiyong, Director of the Fiscal and Taxation Research Center at the Chinese Academy of Social Sciences, believes that in recent years, in response to fiscal revenue pressure, the state has increased the issuance of special treasury bonds to increase subsidies and support for consumption, which has promoted the construction of important areas.

Regarding incremental fiscal policies, they usually refer to a series of measures taken by the government to stimulate economic growth and improve people's livelihoods by increasing fiscal expenditure or adjusting the fiscal structure. In the policy toolkit, the coordination and linkage between fiscal and monetary policies are also an important part of incremental policies, one of which is to support economic recovery through measures such as reserve requirement ratio cuts and interest rate reductions.

Compared with fiscal policy, monetary policy mainly affects the economy by adjusting interest rates and the money supply, addressing more flow issues. Moreover, as the growth of money supply continues over the long term, its marginal effect on driving economic growth will also gradually "dull."Mao Zhenhua, co-director of the Institute of Economics at Renmin University of China, believes that from an effectiveness perspective, the distributional impact of monetary policy is relatively limited. For market entities, operations such as reserve requirement ratio cuts and interest rate reductions cannot simply reverse the trend of "credit contraction."

"For China, which is still in the process of bottoming out the cycle, monetary policy easing does not seem to be omnipotent when there is no substantial improvement in the fundamentals of investment and consumption entities. In the future, it will still be necessary to reallocate resources by strengthening fiscal expenditure to promote demand from contraction to expansion," said Mao Zhenhua.

At the press conference held by the State Council Information Office on October 8, Zheng Shanjie stated that in the future, the coordination and integration of macro policies such as fiscal and tax, monetary and financial, investment and consumption, and income distribution will be strengthened. There will be a focus on enhancing the collaborative innovation of policy tools, grasping the timing, degree, and effectiveness of policy implementation, and amplifying the combined effect of policy combinations. "It is necessary to ensure the necessary fiscal expenditure, accelerate the expenditure progress, and increase the positive promotion of economic development," said Zheng Shanjie.

The market expects that after the introduction of a package of incremental policies, it will provide good development opportunities for enterprises, especially in industries such as the automotive manufacturing and textile industries. The improvement in market expectations will encourage these enterprises to quickly integrate into the mid-to-high end of the industrial chain.

Increasing fiscal expenditure is key.

"The main purpose of fiscal incremental policies is to increase the intensity of macroeconomic regulation through various means, promote the continuous recovery and improvement of the economy, and ensure and improve people's livelihoods," said Yang Zhiyong.

From the perspective of market effects, the key to fiscal policy playing a counter-cyclical regulatory role lies in the larger expenditure of the fiscal sector. This indicates that fiscal expenditure not only affects economic stability and social public demand but also has a significant impact on the distribution of national income.

Looking at past fiscal expenditure data, in 2022, the national general public budget expenditure reached 26.0609 trillion yuan, a 6.1% increase over the previous year. In 2023, the national general public budget expenditure exceeded 27 trillion yuan, a year-on-year increase of 5.4%, with the scale of fiscal expenditure reaching a new high.

In the industry's view, fiscal expenditure, as an important means for the government to perform its functions, can promote high-quality development of the economy and society and ensure the safety of people's livelihoods through reasonable expenditure arrangements.

According to the 2024 "Government Work Report," this year's deficit ratio is planned to be arranged at 3%, with a deficit scale of 4.06 trillion yuan. At the same time, in 2024, an additional 3.9 trillion yuan of special bond limits were added, 500 billion yuan of special treasury bonds issued in 2023 were used this year, and an additional 1 trillion yuan of ultra-long-term special treasury bonds were added in 2024.In addition, the central budgetary investment amounts to 700 billion yuan. After comprehensive calculations, the total scale of these fiscal measures has already exceeded 10 trillion yuan.

According to observations from the China Chengxin International Research Institute, this year, considering the special bonds and ultra-long-term special treasury bonds, the deficit scale is 9.6 trillion yuan. However, the broad deficit ratio (considering special bonds and ultra-long-term special treasury bonds) still declined by about 0.2 percentage points year-on-year to 6.6%. If the weakening of land finance is also considered for its pressure on broad fiscal revenue, fiscal efforts still need to be sustained.

Calculation results show that it is expected that there will be a gap of more than 2.5 trillion yuan between the actual broad fiscal revenue for the whole year and the budgeted revenue at the beginning of the year, of which the general public budget revenue gap is about 1.2 trillion yuan, and the government fund budget revenue gap is about 1.5 trillion yuan.

Looking at the current fiscal revenue and expenditure progress, the overall broad revenue and expenditure gap this year has further expanded by more than 1 trillion yuan compared to last year. Under the condition that the scale of central transfer payments remains basically the same, the increment of national bonds, local government bonds, and central budget funds only increased by about 0.3 trillion yuan compared to last year.

This result is also reflected in the fiscal data for the first eight months. Data from the Ministry of Finance shows that from January to August this year, the national general public budget revenue decreased by 2.6% year-on-year, and the national government fund budget revenue decreased by 21.1% year-on-year.

In addition, the special bond issuance progress from January to August was 65.9%, which is also lower than the historical period in recent years. The growth of fiscal revenue and the issuance of special bonds did not meet expectations, leading to a year-on-year decrease of 2.9% in the sum of general public budget expenditures and government fund budget expenditures.

On this basis, a report from Guangdong Kai Securities pointed out that the current fiscal policy should focus more on the expenditure growth target, rather than the deficit ratio target, to truly achieve counter-cyclical regulation. "Adhering to fiscal discipline and keeping the deficit ratio below 3% has played an important role in preventing inflation and government debt risks. However, it has also brought some negative impacts. Due to the limited deficit ratio, China's fiscal policy has shown a pro-cyclical characteristic, which has weakened the function of counter-cyclical regulation." Luo Zhiheng, the chief economist of Guangdong Kai Securities, analyzed.

Based on this, the aforementioned Central Political Bureau meeting proposed to increase the counter-cyclical adjustment strength of fiscal and monetary policies, ensure necessary fiscal expenditures, and effectively carry out the "three guarantees" work at the grassroots level; it is necessary to issue and use ultra-long-term special treasury bonds and local government special bonds well, and better play the role of government investment in driving.

Earlier, in a Q&A on the economic and fiscal situation, Lan Fo'an stated that in addition to the fiscal's own revenue, a certain scale of deficit was arranged for 2024, and a part of funds were transferred from the budget stability adjustment fund and other government budgets to ensure an increase in the overall fiscal expenditure scale, better play the role of driving domestic demand and promoting economic circulation, and form a necessary support for economic and social development.

Data from the Ministry of Finance shows that through reasonable arrangement of the deficit scale, the national general public budget expenditure has maintained a large intensity, increasing from 12.6 trillion yuan in 2012 to 26.1 trillion yuan in 2022, ensuring the implementation of national major strategies and livelihood policies.